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(From the February 11, 2008 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)
Outlining the interrelationship of ERISA §§ 402 through 405, the Department of Labor explained the basis by which a fiduciary is obligated to collect delinquent contributions, even where the fiduciary is a directed trustee not responsible under the trust document for monitoring or collecting contributions. U.S. Department of Labor Field Assistance Bulletin (FAB) No. 2008- 01 (February 1, 2008).
Overview of ERISA Duties
Concerned with the prevalence of trust agreements that purport to relieve financial institutions serving as plan trustees of any responsibility to monitor or collect delinquent contributions, the Department issued guidance outlining the interrelationship among ERISA §§ 402 through 405, and setting forth a step-by-step analysis by which fiduciaries can more clearly identify their duties to collect delinquent contributions. Essentially:
Therefore, even if a trustee is not responsible for collecting delinquent contributions, if it knows (or, arguably, should have known) that the responsible fiduciary failed to collect, it would have an obligation to take appropriate action to correct that breach.
Appropriate efforts to correct the breach will depend on the circumstances, and would include advising the named fiduciary or Department of Labor of the breach, reporting the breach to other fiduciaries, taking actions to enforce the contribution, seeking an amendment of the plan, or seeking a court order mandating allocation of the duty to collect the contributions.
Clearly, the Department is concerned with financial institutions attempting to limit their ERISA obligations by drafting trust agreements to provide that they have no obligation to monitor or collect contributions. The guidance makes clear that the duties long imposed under ERISA's fiduciary framework are not abrogated by those attempts -- that all trustees (even directed trustees) are fiduciaries who are obligated to satisfy the prudence and exclusive purpose requirements of ERISA § 404(a), and that a fiduciary is liable for the breach of a co-fiduciary under ERISA § 405(a) if it knows of a breach by that fiduciary but fails to take action to remedy it.
The Department observed that the obligation to collect delinquent contributions must rest with either a discretionary trustee, a directed trustee subject to the proper direction of a named fiduciary, or an investment manager -- and that the failure to properly assign the responsibility may cause the fiduciary responsible for the appointment to be liable for plan losses resulting from the failure to collect. Where the appointing fiduciary is the employer, this may have little impact since the employer is presumably already liable for the delinquent contributions. However, where the fiduciary is a committee of individuals or a particular officer of the employer, note should be taken to confirm that the duty to monitor and collect contributions has been properly allocated and does not rest with the appointing fiduciary out of oversight.
The FAB is available on the Department of Labor's Web site at www.dol.gov/ebsa/regs/fab2008-1.html.
/1/ Participant contributions that are withheld from wages become plan assets on the earliest date that the amounts can reasonably be segregated from the employer's general assets. With respect to retirement plans (e.g., 401(k) contributions and after-tax contributions), this date can not be later than the 15th business day of the month following the month the contribution was withheld from wages.
/2/ According to the Department, if the plan is not making "systematic, reasonable and diligent efforts" to collect delinquent employer contributions, the failure may be deemed to be a prohibited transaction under ERISA. Therefore, it is essential for fiduciaries to carefully determine what collection actions are appropriate, since failure to take appropriate action could result in the fiduciary's relationship with the plan (e.g., the fiduciary's receipt of fees for serving as the plan's trustee) being considered a prohibited transaction.
/3/ There are two exceptions to the general rule that a trustee has the exclusive authority and control over the assets. The first exception is where the trustee is subject to the proper direction of a named fiduciary (i.e., is a "directed trustee"). Although the scope of duties assigned to a directed trustee is narrower than those normally ascribed to a discretionary trustee, a directed trustee is nonetheless a fiduciary and is subject to ERISA's fiduciary rules. The second exception is where an investment manager is appointed under ERISA § 402(c)(3). In this case the investment manager and not the trustee is responsible for the management of the assets assigned. Despite the appointment of an investment manager, the trustee remains a fiduciary, however.
/4/ However, in many cases, the fiduciary with the authority to hire the trustees is the employer itself. In the case of late contributions, this entity would already be liable to the plan for losses caused by the delay.
|The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations.
If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Mark Neilio 202.378.5046, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Tom Veal 312.946.2595, Deborah Walker 202.879.4955.
Copyright 2008, Deloitte.
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